Speaking at the 2016 ULI Spring Meeting in Philadelphia, panelists said that while valuations are quite high, the relatively low levels of leverage may mitigate some of the boom-to-bust tendencies of past building cycles. Gerard Sweeney, president and chief executive officer of Brandywine Realty Trust, said, “We have a line of credit with our banks, and one of our business objectives is to never have to draw on that.”
Both Sweeney and William Hankowsky, chairman, president, and chief executive officer (CEO) of Liberty Property Trust, said that they have been net sellers, funding their own development pipelines. But developers who are unable to self-fund in this way are facing challenges, with Hankowsky saying, “The haves can have more; the have-nots can’t find any [financing].”
Investing mixes have changed over the last ten years, with Hankowsky saying his firm has gone from 60 percent office and 40 percent industrial, to 80 percent industrial. Sweeney’s company has become more urban and transit oriented, saying, “Eighty percent of our revenues is urban or suburban served by rail.” Sweeney said his firm is also the third-largest owner of parking in Philadelphia, but one of his early projects in University City demonstrated that parking needs are shifting, as more employees live in the urban core and depend heavily on other methods of transportation.
Greta Guggenheim, CEO of TPG Real Estate Finance Trust, said, “Most of the big banks are pulling back from construction.” She said that with the volatility in the broader stock market in the first quarter of 2016, mortgage real estate investment trusts and conduit lenders also have pulled back. Luxury condominiums have been overbuilt in markets like New York City and Miami in her view, with Guggenheim saying there is nine years’ worth of inventory coming on the market this year in Manhattan, and sales are already down. In south Florida, she said that most of what is being built was presold, but those looking to find financing for more construction are challenged.
But there also are reasons for optimism, said panelists. Favorable changes to the Foreign Investment in Real Property Tax Act (FIRPTA) were implemented by the U.S. Congress in December of 2015, with non-U.S. pension funds being exempted from FIRPTA tax and withholding. S&P Dow Jones Indices and MSCI Inc. have also announced plans to move stock exchange–listed real estate companies from “financials” into their own Global Industry Classification Standard (GICS). This could increase interest from index funds and other kinds of investors, with Hankowsky saying, “It can’t do anything but help.”